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Monday, January 15, 2007

Berson on Housing Overhang

by Calculated Risk on 1/15/2007 10:35:00 PM

Fannie Mae economist David Berson asks: How large is the housing overhang?

We have argued for some time that the surge in housing demand in recent years (principally from investors over the period from 2004 to early-2006) was unsustainable. Understandably, builders responded to this pickup in overall housing demand by significantly increasing house construction. As a result, too many housing units were built in recent years relative to the underlying pace of housing demand-- bringing unsold inventories up to record highs. But how large is this overhang relative to long-term housing demand?
Berson estimates the overhang at about 600K units. In an earlier post, I estimated the overhang at 1.1 to 1.4 million units. The differences in our estimates come from two main sources: 1) I estimated current total demand at about 1.7 million units per year, Berson used 1.8 million units. 2) Since I used a lower number, I also calculated some excess overbuilding prior to 2004; Berson only calculated overbuilding in 2004 through 2006.

The difference is important for estimating the length and depth of the building slump. Using my estimates, I further calculated completions "might fall to 1.2 million units per year over the next few years" and "New Home Sales might fall to 800 thousand per year or less - until the excess inventory is absorbed".

Using Berson's 600K estimate, completions will probably stabilize at around 1.5 million units per year for the next couple of years, and New Home sales will probably decline to 900K per year or so. This is close to Berson's forecast of 975K New Home sales in 2007, and starts of 1.58 million units. (Starts and completions will be close in 2007 if starts stabilize at the 1.5+ million SAAR level).